STONEMOR PARTNERS L.P.

Transcription

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2015 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to. Commission File Number: STONEMOR PARTNERS L.P. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) (215) (Registrant s telephone number, including area code) (I.R.S. Employer Identification No.) 311 Veterans Highway, Suite B Levittown, Pennsylvania (Address of principal executive offices) (Zip Code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

2 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

3 The number of the registrant s outstanding common units at May 1, 2015 was 29,259,424. Index Form 10-Q Part I Financial Information 1 Item 1. Financial Statements (unaudited) 1 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 41 Item 4. Controls and Procedures 42 Part II Other Information 43 Item 1. Legal Proceedings 43 Item 1A. Risk Factors 43 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43 Item 3. Defaults Upon Senior Securities 43 Item 4. Mine Safety Disclosures 43 Item 5. Other Information 43 Item 6. Exhibits 44 Signatures 45 Page

4 Part I Financial Information Item 1. Financial Statements StoneMor Partners L.P. Condensed Consolidated Balance Sheet (unaudited) See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. 1 March 31, 2015 December 31, 2014 Assets Current assets: Cash and cash equivalents $ 6,397 $ 10,401 Accounts receivable, net of allowance 65,429 62,503 Prepaid expenses 3,107 4,708 Other current assets 24,613 24,266 Total current assets 99, ,878 Long-term accounts receivable, net of allowance 91,088 89,536 Cemetery property 339, ,848 Property and equipment, net of accumulated depreciation 99, ,391 Merchandise trusts, restricted, at fair value 488, ,820 Perpetual care trusts, restricted, at fair value 345, ,105 Deferred financing costs, net of accumulated amortization 8,707 9,089 Deferred selling and obtaining costs 102,904 97,795 Deferred tax assets Goodwill 58,836 58,836 Intangible assets 68,441 68,990 Other assets 3,211 3,136 Total assets $1,705,353 $ 1,699,464 Liabilities and partners capital Current liabilities: Accounts payable and accrued liabilities $ 34,552 $ 35,382 Accrued interest 4,742 1,219 Current portion, long-term debt 1,664 2,251 Total current liabilities 40,958 38,852 Other long-term liabilities 1,237 1,292 Obligation for lease and management agreements, net 8,943 8,767 Long-term debt 297, ,378 Deferred cemetery revenues, net 661, ,408 Deferred tax liabilities 17,573 17,708 Merchandise liability 150, ,192 Perpetual care trust corpus 345, ,105 Total liabilities 1,523,150 1,490,702 Commitments and contingencies Partners capital (deficit) General partner deficit (6,204) (5,113) Common partners, 29,259 and 29,204 units outstanding as of March 31, 2015 and December 31, 2014, respectively 188, ,875 Total partners capital 182, ,762 Total liabilities and partners capital $1,705,353 $ 1,699,464

5 StoneMor Partners L.P. Condensed Consolidated Statement of Operations (in thousands, except per unit data) (unaudited) See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. 2 Three months ended March 31, Revenues: Cemetery Merchandise $26,937 $26,068 Services 13,910 10,297 Investment and other 11,310 16,275 Funeral home Merchandise 7,075 5,052 Services 8,185 6,695 Total revenues 67,417 64,387 Costs and expenses: Cost of goods sold (exclusive of depreciation shown separately below): Perpetual care 1,667 1,391 Merchandise 5,416 6,113 Cemetery expense 16,265 13,329 Selling expense 13,910 11,189 General and administrative expense 9,329 7,645 Corporate overhead (including $272 and $271 in unit-based compensation for the three months ended March 31, 2015 and 2014, respectively) 8,734 7,456 Depreciation and amortization 2,952 2,368 Funeral home expense Merchandise 2,376 1,646 Services 5,593 4,787 Other 4,181 2,853 Acquisition related costs, net of recoveries Total cost and expenses 70,772 59,126 Operating profit (loss) (3,355) 5,261 Gain on acquisition 412 Interest expense 5,463 5,574 Net income (loss) before income taxes (8,818) 99 Income tax expense (benefit) 65 (310) Net income (loss) $ (8,883) $ 409 General partner s interest in net income (loss) for the period $ (120) $ 4 Limited partners interest in net income (loss) for the period $ (8,763) $ 405 Net income (loss) per limited partner unit (basic and diluted) $ (.30) $.02 Weighted average number of limited partners units outstanding - basic 29,230 22,493 Weighted average number of limited partners units outstanding -diluted 29,230 22,787 Distributions declared per unit $.630 $.600

6 StoneMor Partners L.P. Condensed Consolidated Statement of Partners Capital (Deficit) (unaudited) See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. 3 Common Unit Holders Partners Capital (Deficit) General Partner Balance, December 31, 2014 $ 213,875 $(5,113) $208,762 Issuance of common units 1,421 1,421 Compensation related to unit awards Net loss (8,763) (120) (8,883) Cash distributions (16,977) (971) (17,948) Unit distributions (1,421) (1,421) Balance, March 31, 2015 $ 188,407 $(6,204) $182,203 Total

7 StoneMor Partners L.P. Condensed Consolidated Statement of Cash Flows (unaudited) See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. 4 For the three months ended March 31, Operating activities: Net income (loss) $ (8,883) $ 409 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Cost of lots sold 2,048 3,057 Depreciation and amortization 2,952 2,368 Unit-based compensation Accretion of debt discounts Gain on acquisition (412) Changes in assets and liabilities that provided (used) cash: Accounts receivable (5,196) (3,168) Allowance for doubtful accounts Merchandise trust fund (10,231) (16,420) Prepaid expenses 1,601 1,142 Other current assets (348) 3,394 Other assets (92) (44) Accounts payable and accrued and other liabilities 2,524 (9,564) Deferred selling and obtaining costs (5,109) (2,803) Deferred cemetery revenue 24,842 18,881 Deferred taxes (net) (135) (551) Merchandise liability 155 (829) Net cash provided by (used in) operating activities 5,853 (2,940) Investing activities: Cash paid for cemetery property (1,501) (748) Purchase of subsidiaries (200) Cash paid for property and equipment (1,314) (1,330) Net cash used in investing activities (2,815) (2,278) Financing activities: Cash distributions (17,948) (13,391) Additional borrowings on long-term debt 20,335 17,000 Repayments of long-term debt (9,395) (55,504) Proceeds from public offerings 53,178 Cost of financing activities (34) Net cash provided by (used in) financing activities (7,042) 1,283 Net decrease in cash and cash equivalents (4,004) (3,935) Cash and cash equivalents - Beginning of period 10,401 12,175 Cash and cash equivalents - End of period $ 6,397 $ 8,240 Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 1,176 $ 1,423 Cash paid during the period for income taxes $ 66 $ Non-cash investing and financing activities: Acquisition of assets by financing $ 137 $ 30

8 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations StoneMor Partners L.P. ( StoneMor, the Company or the Partnership ) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, StoneMor offers a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a pre-need basis. As of March 31, 2015, the Partnership operated 303 cemeteries in 27 states and Puerto Rico, of which 272 are owned and 31 are operated under lease, management or operating agreements. The Partnership also owned and operated 98 funeral homes in 19 states and Puerto Rico. Basis of Presentation The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America ( GAAP ). All interim financial data is unaudited. However, in the opinion of management, the interim financial data as of March 31, 2015 and for the three months ended March 31, 2015 and 2014 includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for a full year. The December 31, 2014 condensed consolidated balance sheet data was derived from audited financial statements included in the Company s 2014 Annual Report on Form 10-K ( 2014 Form 10-K ), but does not include all disclosures required by GAAP, which are presented in the Company s 2014 Form 10-K. Principles of Consolidation The unaudited condensed consolidated financial statements include the accounts of each of the Company s subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The Company operates 31 cemeteries under long-term lease, operating or management contracts. The operations of 16 of these managed cemeteries have been consolidated in accordance with the provisions of Accounting Standards Codification (ASC) 810. The Company operates 15 cemeteries under long-term lease, operating or management agreements that do not qualify as acquisitions for accounting purposes, including 13 cemeteries related to the transaction with the Archdiocese of Philadelphia that closed in the second quarter of As a result, the Company did not consolidate all of the existing assets and liabilities related to these cemeteries. The Company has consolidated the existing assets and liabilities of these cemeteries merchandise and perpetual care trusts as variable interest entities since the Company controls and receives the benefits and absorbs any losses from operating these trusts. Under these long-term lease, operating or management agreements, which are subject to certain termination provisions, the Company is the exclusive operator of these cemeteries. The Company earns revenues related to sales of merchandise, services, and interment rights and incurs expenses related to such sales and the maintenance and upkeep of these cemeteries. Upon termination of these contracts, the Company will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. The Company has also recognized the existing merchandise liabilities that it assumed as part of these agreements. New Accounting Pronouncements In the second quarter of 2014, the Financial Accounting Standards Board issued Update No , Revenue from Contracts with Customers (Topic 606) ( ASU ), which supersedes the revenue recognition requirements in Topic Revenue Recognition and most industry-specific guidance. The core principle of ASU is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. On April 29, 2015, the Financial Accounting Standards Board issued for public comment a proposed update that would defer the effective date of ASU by one year. The Company is currently in the process of evaluating the potential impact of this update on its financial statements. In the first quarter of 2015, the Financial Accounting Standards Board issued Update No , Consolidation (Topic 810) ( ASU ), which amends previous consolidation analysis guidance. ASU requires 5

9 companies to consider revised consolidation criteria regarding limited partnerships and similar legal entities. The amendments are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early application is permitted. The Company is currently in the process of evaluating the impact of this update, which is not expected to have a significant impact on the Company s financial position, results of operations, or cash flows. In the second quarter of 2015, the Financial Accounting Standards Board issued Update No , Interest - Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs ( ASU ), which changes the presentation of debt issuance costs. ASU requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU The amendments in the update are effective for annual reporting periods beginning after December 15, 2015, including interim periods within those reporting periods. Early application is permitted. The Company is currently in the process of evaluating the impact of this update, which is not expected to have a significant impact on its financial position, results of operations, or cash flows. Use of Estimates Preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting periods. As a result, actual results could differ from those estimates. The most significant estimates in the unaudited condensed consolidated financial statements are the valuation of assets in the merchandise trusts and perpetual care trusts, allowance for cancellations, unit-based compensation, merchandise liability, deferred sales revenue, deferred margin, deferred merchandise trust investment earnings, deferred obtaining costs, assets and liabilities obtained via business combinations and income taxes. Deferred sales revenue, deferred margin and deferred merchandise trust investment earnings are included in deferred cemetery revenues, net, on the unaudited condensed consolidated balance sheet. 2. LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE Long-term accounts receivable, net, consists of the following: Activity in the allowance for contract cancellations is as follows: 6 March 31, 2015 As of December 31, 2014 Customer receivables $200,643 $ 194,537 Unearned finance income (20,911) (20,360) Allowance for contract cancellations (23,215) (22,138) 156, ,039 Less: current portion, net of allowance 65,429 62,503 Long-term portion, net of allowance $ 91,088 $ 89,536

10 For the three months ended March 31, Balance - Beginning of period $ 22,138 $ 20,275 Provision for cancellations 6,072 5,031 Charge-offs - net (4,995) (4,057) Balance - End of period $ 23,215 $ 21,249 There have been no changes to the Company s long-term accounts receivable accounting policies since the filing of the Company s 2014 Form 10-K. 3. CEMETERY PROPERTY Cemetery property consists of the following: March 31, 2015 As of December 31, 2014 Developed land $ 79,134 $ 79,058 Undeveloped land 172, ,238 Mausoleum crypts and lawn crypts 78,518 78,524 Other land 10,028 10,028 Total $339,821 $ 339, PROPERTY AND EQUIPMENT Major classes of property and equipment follow: March 31, 2015 As of December 31, 2014 Building and improvements $108,615 $ 108,178 Furniture and equipment 50,019 49, , ,468 Less: accumulated depreciation (59,065) (57,077) Property and equipment - net $ 99,569 $ 100,391 Depreciation expense was $2.4 million and $2.0 million during the three months ended March 31, 2015 and 2014, respectively. 5. MERCHANDISE TRUSTS At March 31, 2015, the Company s merchandise trusts consisted of the following types of assets: Money market funds that invest in low risk short term securities; 7

11 Publicly traded mutual funds that invest in underlying debt securities; Publicly traded mutual funds that invest in underlying equity securities; Equity investments primarily in securities that are currently paying dividends or distributions. These investments include Master Limited Partnerships and global equity securities; Fixed maturity debt securities issued by various corporate entities; and Fixed maturity debt securities issued by U.S. states and local government agencies. All of these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. See Note 15 for further details. There were no Level 3 assets. The merchandise trusts are variable interest entities (VIE) for which the Company is the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise to which they relate. If the value of these assets falls below the cost of purchasing such merchandise, the Company may be required to fund this shortfall. The Company has included $8.4 million and $8.3 million of investments held in trust by the West Virginia Funeral Directors Association at March 31, 2015 and December 31, 2014, respectively, in its merchandise trust assets. As required by law, the Company deposits a portion of certain funeral merchandise sales in West Virginia into a trust that is held by the West Virginia Funeral Directors Association. These trusts are recorded at their account value, which approximates their fair value. The cost and market value associated with the assets held in the merchandise trusts at March 31, 2015 and December 31, 2014 were as follows: 8

12 As of March 31, 2015 Cost Gross Unrealized Gains Gross Unrealized Losses Short-term investments $ 31,591 $ $ $ 31,591 Fixed maturities: U.S. State and local government agency Corporate debt securities 12, (376) 12,257 Other debt securities 7,182 (8) 7,174 Total fixed maturities 19, (384) 19,511 Mutual funds - debt securities 246, (9,047) 238,699 Mutual funds - equity securities 129,452 2,772 (1,578) 130,646 Equity securities 54,888 3,500 (4,336) 54,052 Other invested assets 5,469 (343) 5,126 Total managed investments $487,981 $ 7,332 $ (15,688) $479,625 West Virginia Trust Receivable 8,382 8,382 Total $496,363 $ 7,332 $ (15,688) $488,007 Fair Value As of December 31, 2014 Cost The contractual maturities of debt securities as of March 31, 2015 are presented below: 9 Gross Unrealized Gains Gross Unrealized Losses Short-term investments $ 52,521 $ $ $ 52,521 Fixed maturities: U.S. State and local government agency 270 (1) 269 Corporate debt securities 9, (447) 8,976 Other debt securities 7,157 (18) 7,139 Total fixed maturities 16, (466) 16,384 Mutual funds - debt securities 150, (8,666) 142,680 Mutual funds - equity securities 167,353 12,568 (463) 179,458 Equity securities 81,639 4,167 (5,507) 80,299 Other invested assets 5,400 (241) 5,159 Total managed investments $474,217 $ 17,627 $ (15,343) $476,501 West Virginia Trust Receivable 8,319 8,319 Total $482,536 $ 17,627 $ (15,343) $484,820 Fair Value

13 As of March 31, 2015 Less than 1 year 1 year through 5 years 6 years through 10 years More than 10 years U.S. State and local government agency $ $ 18 $ 60 $ 2 Corporate debt securities 7,052 5,205 Other debt securities 891 6,283 Total fixed maturities $ 891 $ 13,353 $ 5,265 $ 2 Temporary Declines in Fair Value The Company evaluates declines in fair value below cost of each individual asset held in the merchandise trusts on a quarterly basis. An aging of unrealized losses on the Company s investments in fixed maturities and equity securities at March 31, 2015 and December 31, 2014 is presented below: As of March 31, 2015 Less than 12 months 12 Months or more Total Number of Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities in Loss Position (in thousands, except number of securities data) Fixed maturities: Corporate debt securities $ 6,070 $ 214 $ 2,539 $ 162 $ 8,609 $ Other debt securities 2, , , Total fixed maturities 8, , , Mutual funds - debt securities 87, ,090 8, ,132 9, Mutual funds - equity securities 49,100 1,578 49,100 1,578 4 Equity securities 26,285 3,671 3, ,796 4, Other invested assets 4, , Total $170,881 $ 6,082 $147,848 $ 9,606 $318,729 $ 15, As of December 31, 2014 Less than 12 months 12 Months or more Total Number of Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities in Loss Position (in thousands, except number of securities data) Fixed maturities: U.S. State and local government agency $ 143 $ 1 $ $ $ 143 $ 1 3 Corporate debt securities 5, , , Other debt securities 2, , , Total fixed maturities 8, , , Mutual funds - debt securities 32,072 1,039 95,629 7, ,701 8, Mutual funds - equity securities 4, , Equity securities 44,563 4,641 3, ,472 5, Other invested assets 4, , Total $89,200 $ 6,494 $110,694 $ 8,849 $199,894 $ 15, There were 148 and 171 securities in an unrealized loss position in merchandise trusts as of March 31, 2015 and December 31, 2014, respectively, of which 38 and 39, respectively, were in an unrealized loss position for more than twelve months. For all securities in an unrealized loss position, the Company evaluated the severity of the impairment and length of time that a security has been in a loss position and has concluded the decline in fair value below the asset s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities. 10

14 Other-Than-Temporary Impairment of Trust Assets During the three months ended March 31, 2015, the Company determined that there were two securities with an aggregate cost basis of approximately $0.6 million and an aggregate fair value of approximately $0.4 million, resulting in an impairment of $0.2 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset this change against deferred revenue. This reduction in deferred revenue will be reflected in earnings in future periods as the underlying merchandise is delivered or the underlying service is performed. During the three months ended March 31, 2014, the Company determined that there were no other than temporary impairments to the investment portfolio in the merchandise trusts. A reconciliation of the Company s merchandise trust activities for the three months ended March 31, 2015 is presented below: Fair Value at 12/31/2014 Contributions Distributions Interest/ Dividends Capital Gain Distributions Realized Gain/ Loss (1) Taxes Fees Unrealized Change in Fair Value The Company made net contributions into the trusts of approximately $5.0 million during the three months ended March 31, During the three months ended March 31, 2015, purchases and sales of securities available for sale included in trust investments were approximately $239.0 million and $239.1 million, respectively. Fair Value at 3/31/2015 $484,820 16,540 (11,537) 3,874 5,702 (15) (737) (10,640) $488,007 (1) Includes $3.9 million representing the net effect of other-than-temporary impairment charges and the release of previously realized impairment charges, as a result of sales and maturities of impaired securities. 6. PERPETUAL CARE TRUSTS At March 31, 2015, the Company s perpetual care trusts consisted of the following types of assets: Money market funds that invest in low risk short term securities; Publicly traded mutual funds that invest in underlying debt securities; Publicly traded mutual funds that invest in underlying equity securities; Equity investments that are currently paying dividends or distributions. These investments include Master Limited Partnerships and global equity securities; Fixed maturity debt securities issued by various corporate entities; Fixed maturity debt securities issued by the U.S. Government and U.S. Government agencies; and Fixed maturity debt securities issued by U.S. states and local government agencies. All of these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. See Note 15 for further details. There were no Level 3 assets. The cost and market value associated with the assets held in the perpetual care trusts at March 31, 2015 and December 31, 2014 were as follows: 11

15 As of March 31, 2015 Cost Gross Unrealized Gains Gross Unrealized Losses Short-term investments $ 30,012 $ $ $ 30,012 Fixed maturities: U.S. Government and federal agency U.S. State and local government agency Corporate debt securities 24, (782) 24,216 Other debt securities Total fixed maturities 25, (782) 24,730 Mutual funds - debt securities 202, (4,777) 198,056 Mutual funds - equity securities 77,034 12,763 (40) 89,757 Equity securities 2, (35) 2,621 Other invested assets 7 7 Total $336,911 $ 13,906 $ (5,634) $345,183 Fair Value As of December 31, 2014 Cost The contractual maturities of debt securities as of March 31, 2015 were as follows: 12 Gross Unrealized Gains Gross Unrealized Losses Fair Value Short-term investments $ 26,644 $ $ $ 26,644 Fixed maturities: U.S. Government and federal agency U.S. State and local government agency Corporate debt securities 24, (913) 23,466 Other debt securities Total fixed maturities 24, (913) 24,032 Mutual funds - debt securities 128, (5,220) 123,894 Mutual funds - equity securities 103,701 23,003 (1,268) 125,436 Equity securities 30,617 14,704 (247) 45,074 Other invested assets Total $314,546 $ 38,207 $ (7,648) $345,105 As of March 31, 2015 Less than 1 year 1 year through 5 years 6 years through 10 years More than 10 years U.S. Government and federal agency $ $ 115 $ $ U.S. State and local government agency 28 Corporate debt securities ,723 9, Other debt securities 371 Total fixed maturities $ 854 $ 14,838 $ 9,018 $ 20

16 Temporary Declines in Fair Value The Company evaluates declines in fair value below cost of each individual asset held in the perpetual care trusts on a quarterly basis. An aging of unrealized losses on the Company s investments in fixed maturities and equity securities at March 31, 2015 and December 31, 2014 is presented below: As of March 31, 2015 Less than 12 months 12 Months or more Total Number of Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities in Loss Position (in thousands, except number of securities data) Fixed maturities: Corporate debt securities $10,571 $ 516 $ 3,861 $ 266 $ 14,432 $ Total fixed maturities 10, , , Mutual funds - debt securities 18, ,177 4, ,614 4, Mutual funds - equity securities 3, , Equity securities Total $32,703 $ 1,117 $123,657 $ 4,517 $156,360 $ 5, As of December 31, 2014 Less than 12 months 12 Months or more Total Number of Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities in Loss Position (in thousands, except number of securities data) Fixed maturities: Corporate debt securities $14,434 $ 798 $ 2,519 $ 115 $ 16,953 $ Total fixed maturities 14, , , Mutual funds - debt securities 30, ,814 4, ,159 5, Mutual funds - equity securities 13,035 1,268 13,035 1,268 5 Equity securities 3, , Total $61,680 $ 3,079 $89,953 $ 4,569 $151,633 $ 7, There were 112 and 148 securities in an unrealized loss position in perpetual care trusts as of March 31, 2015 and December 31, 2014, respectively, of which 22 and 20, respectively, were in an unrealized loss position for more than twelve months. For all securities in an unrealized loss position, the Company evaluated the severity of the impairment and length of time that a security has been in a loss position and has concluded the decline in fair value below the asset s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities. Other-Than-Temporary Impairment of Trust Assets During the three months ended March 31, 2015 and 2014, the Company determined that there were no other than temporary impairments to the investment portfolio in the perpetual care trusts. A reconciliation of the Company s perpetual care trust activities for the three months ended March 31, 2015 is presented below: 13

17 Fair Value at 12/31/2014 Contributions Distributions Interest/ Dividends Capital Gain Distributions Realized Gain/ Loss (1) Taxes Fees Unrealized Change in Fair Value The Company made net contributions into the trusts of approximately $3.7 million during the three months ended March 31, During the three months ended March 31, 2015, purchases and sales of securities available for sale included in trust investments were approximately $233.9 million and $230.7 million, respectively. Fair Value at 3/31/2015 $345,105 6,478 (2,793) 3,649 15,699 (134) (534) (22,287) $345,183 (1) Includes $12.0 million representing the net effect of other-than-temporary impairment charges and the release of previously realized impairment charges, as a result of sales and maturities of impaired securities. 7. GOODWILL AND INTANGIBLE ASSETS Goodwill Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in acquisitions. There have been no changes in the goodwill balance during the period and a summary by reportable segment is as follows: Cemeteries Funeral Southeast Northeast West Homes Total Goodwill as of March 31, 2015 and December 31, 2014 $ 8,950 $ 3,288 $11,948 $34,650 $58,836 Other Acquired Intangible Assets The Company has other acquired intangible assets, most of which have been recognized as a result of acquisitions and long-term lease, management and operating agreements. All of the intangible assets are amortized as a component of depreciation and amortization in the unaudited condensed consolidated statement of operations. The major classes of intangible assets are as follows: Gross Carrying Amount As of March 31, 2015 As of December 31, 2014 Accumulated Net Intangible Gross Carrying Accumulated Amortization Asset Amount Amortization Net Intangible Asset Amortized intangible assets: Lease and management agreements $ 59,758 $ (830) $ 58,928 $ 59,758 $ (581) $ 59,177 Underlying contract value 6,239 (897) 5,342 6,239 (858) 5,381 Non-compete agreements 5,250 (2,375) 2,875 5,250 (2,126) 3,124 Other intangible assets 1,439 (143) 1,296 1,439 (131) 1,308 Total intangible assets $ 72,686 $ (4,245) $ 68,441 $ 72,686 $ (3,696) $ 68,990 See Note 7 of the Company s 2014 Form 10-K for a discussion of the Company s intangible assets, including its contract-based intangible asset pertaining to the lease and management agreements with the Archdiocese of Philadelphia. 8. LONG-TERM DEBT The Company had the following outstanding debt: 14

18 March 31, 2015 As of December 31, % Senior Notes, due June 2021 $175,000 $ 175,000 Credit Facility, due December 2019: Working Capital Draws 97,902 85,902 Acquisition Draws 25,000 25,000 Notes payable - acquisition debt Notes payable - acquisition non-competes 2,396 2,765 Insurance and vehicle financing 1,121 1,632 Total 302, ,160 Less current portion 1,664 2,251 Less unamortized bond and note payable discounts 3,390 3,531 Long-term portion $297,184 $ 285,378 This note includes a summary of material terms of the Company s senior notes and revolving credit facility. For a more detailed description of the Company s long-term debt agreements, see the Company s 2014 Form 10-K % Senior Notes due 2021 On May 28, 2013, the Company issued $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the Senior Notes ). The Company pays 7.875% interest per annum on the principal amount of the Senior Notes, payable in cash semiannually in arrears on June 1 and December 1 of each year, since December 1, The net proceeds from the offering were used to retire a $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at % of par resulting in gross proceeds of $171.2 million with an original issue discount of approximately $3.8 million. The Company incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and are amortized over the life of the Senior Notes. Based on trades made on March 31, 2015, the Company has estimated the fair value of its Senior Notes to be in excess of par and trading at a premium of 4.94%, which would imply a fair value of $183.6 million at March 31, The Senior Notes are valued using Level 2 inputs as defined by the Fair Value Measurements and Disclosures topic of the ASC in Note 15. As of March 31, 2015, the Company was in compliance with all applicable covenants of the Senior Notes. Credit Facility On December 19, 2014, the Partnership entered into the Fourth Amended and Restated Credit Agreement (the Credit Agreement ). The Credit Agreement provides for a single revolving credit facility of $180.0 million (the Credit Facility ) maturing on December 19, Additionally the Credit Agreement provides for an uncommitted ability to increase the Credit Facility by an additional $70.0 million. The summary of the material terms of the Credit Agreement is set forth below. Capitalized terms, which are not defined in the following description, shall have the meaning assigned to such terms in the Credit Agreement. At March 31, 2015, amounts outstanding under the Credit Facility bore interest at rates of approximately 3.5%. The interest rates on the Credit Facility are calculated as follows: For Eurodollar Rate Loans, the outstanding principal amount thereof bears interest for each Interest Period at a rate per annum equal to the Eurodollar Rate for the Interest Period plus the Applicable Rate for Eurodollar Rate Loans; and For Base Rate Loans and Swing Line Loans, the outstanding principal amount thereof bears interest from the applicable borrowing date at a rate per annum equal to the Base Rate plus the Applicable Rate for Base Rate Loans. 15

19 In addition, the Borrowers must pay a Letter of Credit Fee for each Letter of Credit equal to the Applicable Rate for Letter of Credit Fees times the daily amount to be drawn under such Letter of Credit. The Applicable Rate is determined based on the Consolidated Leverage Ratio of the Partnership and its Subsidiaries, and ranges from 2.25% to 4.00% for Eurodollar Rate Loans and Letter of Credit Fees, and 1.25% to 3.00% for Base Rate Loans. The current Applicable Rate for each of: (i) Eurodollar Rate Loans and Letter of Credit Fees is 3.75% and (ii) Base Rate Loans is 2.75% based on the current Consolidated Leverage Ratio. The Credit Agreement also requires the Borrowers to pay a quarterly unused commitment fee, which is calculated based on the amount by which the commitments under the Credit Agreement exceed the usage of such commitments. The Credit Agreement contains financial covenants, pursuant to which the Borrowers and the Guarantors will not permit: Consolidated EBITDA for any Measurement Period to be less than the sum of (i) $80.0 million plus (ii) 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after June 30, 2014; the Consolidated Debt Service Coverage Ratio to be less than 2.50 to 1.0 for any Measurement Period; and the Consolidated Leverage Ratio to be greater than 4.00 to 1.0 for any period. The covenants include, among other limitations, limitations on: (i) liens, (ii) the creation or incurrence of debt, (iii) investments and acquisitions, (iv) dispositions of property, (v) dividends, distributions and redemptions, and (vi) transactions with Affiliates. The Credit Agreement provides that two types of draws are permitted with respect to the Credit Facility: Acquisition Draws and Working Capital Draws. The proceeds of Acquisition Draws may be utilized by the Borrowers to finance Permitted Acquisitions, the purchase and construction of mausoleums and related costs or the net amount of Merchandise Trust deposits made after the Closing Date under the Credit Agreement, irrespective of whether such amounts relate to new or existing cemeteries or funeral homes. The proceeds of Working Capital Draws, Letters of Credit and Swing Line Loans may be utilized by the Borrowers to finance working capital requirements, Capital Expenditures and for other general corporate purposes. The borrowing of Working Capital Advances is subject to a borrowing formula of 85% of Eligible Receivables. This limit was $133.0 million at March 31, Each Acquisition Draw is subject to equal quarterly amortization of the principal amount of such draw, with annual principal payments comprised of ten percent (10%) of the related draw amount, commencing on the second anniversary of such draw, with the remaining principal due on the Maturity Date, subject to certain mandatory prepayment requirements. Working Capital Draws are due on the Maturity Date, subject to certain mandatory prepayment requirements. As of March 31, 2015, there were $122.9 million of outstanding borrowings under the Credit Facility. The Credit Facility approximates fair value as it consists of multiple current LIBOR borrowings with maturities of 90 days or less, with amounts that can be rolled-over or reborrowed at market rates. It is valued using Level 2 inputs. As of March 31, 2015, the Company complied with all applicable financial covenants. The Company routinely incurs debt financing costs and fees when borrowing under, or making amendments to, the Credit Facility. These costs and fees are deferred and are amortized over the life of the Credit Facility. 9. INCOME TAXES As of March 31, 2015, the Company s taxable corporate subsidiaries had federal net operating loss carryforwards of approximately $223.1 million, which will begin to expire in 2017 and $272.0 million in state net operating loss carryforwards, a portion of which expires annually. The Partnership is not a taxable entity for federal and state income tax purposes; rather, the Partnership s tax attributes, except those of its corporate subsidiaries, are to be included in the individual tax returns of its partners. Neither the Partnership s financial reporting income, nor the cash distributions to unit-holders, can be used as a substitute for the detailed tax calculations that the Partnership must perform annually for its partners. Net income from the Partnership is not treated as passive income for federal income tax purposes. As a result, partners subject to the passive activity loss rules are not permitted to offset income from the Partnership with passive losses from other sources. The Partnership s corporate subsidiaries account for their income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. 16

20 Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The provision for income taxes for the three months ended March 31, 2015 and 2014 is based upon the estimated annual effective tax rates expected to be applicable to the Company for 2015 and 2014, respectively. The Company s effective tax rate differs from its statutory tax rate primarily because the Company s legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax. The Company is not currently under examination by any federal or state jurisdictions. The federal statute of limitations and certain state statutes of limitations are open from 2011 forward. Management believes that the accrual for tax liabilities is adequate for all open years. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. On the basis of present information, it is the opinion of the Company s management that there are no pending assessments that will result in a material effect on the Company s consolidated financial statements over the next twelve months. 10. DEFERRED CEMETERY REVENUES, NET At March 31, 2015 and December 31, 2014, deferred cemetery revenues, net, consisted of the following: March 31, 2015 As of December 31, 2014 Deferred cemetery revenue $477,420 $ 456,632 Deferred merchandise trust revenue 116, ,717 Deferred merchandise trust unrealized gains (losses) (8,356) 2,284 Deferred pre-acquisition margin 139, ,378 Deferred cost of goods sold (63,209) (60,603) Deferred cemetery revenues, net $661,877 $ 643,408 Deferred selling and obtaining costs $102,904 $ 97,795 Deferred selling and obtaining costs are carried as an asset on the unaudited condensed consolidated balance sheet in accordance with the Financial Services Insurance topic of the ASC. 11. COMMITMENTS AND CONTINGENCIES Legal The Company is party to legal proceedings in the ordinary course of its business but does not expect the outcome of any proceedings, individually or in the aggregate, to have a material effect on the Company s financial position, results of operations or liquidity. Leases At March 31, 2015, the Company was committed to operating lease payments for premises, automobiles and office equipment under various operating leases with initial terms ranging from one to twenty five years and options to renew at varying terms. Expenses under these operating leases were $0.7 million and $0.6 million during the three months ended March 31, 2015 and 2014, respectively. The operating leases will result in future payments in the following approximate amounts from March 31, 2015 and beyond: 17

21 2015 $ 2, , , , , Thereafter 1,744 Total $ 12,744 Other See Note 13 of the Company s 2014 Form 10-K for a discussion of the Company s future commitments related to its agreements with the Archdiocese of Philadelphia. 12. PARTNERS CAPITAL The table below reflects the activity relating to the number of common units outstanding for the three months ended March 31, 2015: Three months ended March 31, 2015 Outstanding, beginning of period 29,203,595 Unit distributions 54,622 Unit-based compensation 1,148 Outstanding, end of period 29,259,365 Unit-Based Compensation The Company has issued to certain key employees, management, and directors unit-based compensation in the form of unit appreciation rights and restricted phantom partnership units. Compensation expense recognized related to unit appreciation rights and restricted phantom unit awards for the three months ended March 31, 2015 and 2014 are summarized in the table below: Three months ended March 31, Unit appreciation rights $ 21 $ 19 Restricted phantom units Total unit-based compensation expense $ 272 $ 271 As of March 31, 2015, there was approximately $0.1 million in non-vested unit appreciation rights expense outstanding. These unit appreciation rights will be expensed through The diluted weighted average number of limited partners units outstanding presented on the unaudited condensed consolidated statement of operations does not include 185,194 units for the three months ended March 31, 2015, as their effects would be antidilutive. During the three months ended March 31, 2015, 1,148 common units were issued under the StoneMor Partners L.P. Long-Term Incentive Plans. See Note 11 of the Company s 2014 Form 10-K for a description of the Company s Long-Term Incentive Plans. 18

22 Other Unit Issuances Pursuant to a Common Unit Purchase Agreement, dated May 19, 2014, by and between the Company and American Cemeteries Infrastructure Investors, LLC, a Delaware limited liability company ( ACII ), the Company issued 54,622 common units to ACII in lieu of a cash distribution of approximately $1.4 million on February 16, Refer to the Company s 2014 Form 10-K, Note 17, for a detailed discussion of the Common Unit Purchase Agreement. 13. ACQUISITIONS First Quarter 2014 Acquisition On January 16, 2014, certain subsidiaries of the Company (collectively the Buyer ) entered into an Asset Purchase and Sale Agreement with Carriage Cemetery Services, Inc. (the Seller ). Pursuant to the Agreement, the Buyer acquired one cemetery in Florida, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $0.2 million in cash. The table below reflects the Company s final assessment of the fair value of net assets acquired and the resulting gain on bargain purchase. If the acquisition noted above had been consummated at the beginning of the comparable prior annual reporting period, on a pro forma basis, for the three months ended March 31, 2015 and 2014, consolidated revenues, consolidated net income (loss), and net income (loss) per limited partner unit (basic and diluted) would have been as follows: 19 Final Assessment Assets: Accounts receivable $ 47 Cemetery property 470 Property and equipment 140 Merchandise trusts, restricted, at fair value 2,607 Perpetual care trusts, restricted, at fair value 691 Total assets 3,955 Liabilities: Deferred margin 1,035 Merchandise liabilities 956 Deferred tax liability 641 Perpetual care trust corpus 691 Other liabilities 20 Total liabilities 3,343 Fair value of net assets acquired 612 Consideration paid 200 Gain on bargain purchase $ 412

23 Three months ended March 31, (in thousands, except per unit data) Revenue $ 67,417 $ 64,398 Net income (loss) (8,883) (2) Net income (loss) per limited partner unit (basic and diluted) $ (.30) $ These pro forma results are unaudited, have been prepared for comparative purposes only, and may include certain adjustments such as increased interest on the acquisition of debt, changes in the timing of financing events and the recognition of gains on acquisitions. They do not purport to be indicative of the results of operations which actually would have resulted had this acquisition been in effect at the beginning of the comparable prior annual reporting period or of future results of operations of the location. The property acquired in the first quarter of 2014 has contributed less than $0.1 million of revenue and operating profit for both the three months ended March 31, 2015 and the three months ended March 31, Other 2014 Acquisitions and Agreements See Note 13 of the Company s 2014 Form 10-K for a discussion of the Company s other 2014 acquisitions and its agreements with the Archdiocese of Philadelphia. There have been no changes during the period to assessments of the fair value of net assets acquired in the other 2014 acquisitions. Those amounts may be retrospectively adjusted as additional information is received. 14. SEGMENT INFORMATION The Company is organized into five distinct reportable segments, which are classified as Cemetery Operations Southeast, Cemetery Operations Northeast, Cemetery Operations West, Funeral Homes, and Corporate. The Company has chosen this level of organization of reportable segments due to the fact that a) each reportable segment has unique characteristics that set it apart from other segments; b) the Company has organized its management personnel at these operational levels; and c) it is the level at which the Company s chief decision makers and other senior management evaluate performance. The cemetery operations segments sell interment rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. The nature of the Company s customers differs in each of its regionally based cemetery operating segments. Cremation rates in the West region are substantially higher than they are in the Southeast region. Rates in the Northeast region tend to be somewhere between the two. Statistics indicate that customers who select cremation services have certain attributes that differ from customers who select other methods of interment. The disaggregation of cemetery operations into the three distinct regional segments is primarily due to these differences in customer attributes along with the previously mentioned management structure and senior management analysis methodologies. The Company s Funeral Homes segment offers a range of funeral-related services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation. These services are distinctly different than the cemetery merchandise and services sold and provided by the cemetery operations segments. The Company s Corporate segment includes various home office selling and administrative expenses that are not allocable to the other operating segments. Segment information is as follows: As of and for the three months ended March 31, 2015: 20